No sure leader of the pack
Superficially, Woolworths looks terrible, while TFG is going gangbusters. But analysts warn that not all is obvious
Fair dues to them. SA retailers are a really formidable lot. The past two years have seen them battle through challenges of biblical proportions. Inevitably, some have done better than others. At this stage of the pandemic marathon, TFG seems to be leading the pack and Woolworths is trailing at the back.
But even that ranking is uncertain – the comparatives are too murky, rendered unhelpful by merger & acquisition activity, shifting geographic exposure and an increase or reduction in footprint, as well as varying responses to the early months of Covid.
That’s evident in a short-term look at their share prices too: the worst performer over six months isn’t Woolworths — down 6% — but
TFG, which has lost 13.6% in value.
Mr Price, on the other hand, is off just 0.3%, while Truworths is 2% weaker.
The bare bones show Woolworths’ turnover is down 2.1% for the six months to December 26, though trading picked up in the final six weeks in all divisions except fashion, beauty and home. Lest there isn’t enough to confuse investors, Woolworths’ management has offered up three possible earnings figures: earnings per share (EPS), expected to drop between 35% and 45%; headline EPS, expected to fall between 30% and 40%; and adjusted diluted HEPS, expected to shed just 10% to 20%.
At Truworths, retail sales were up a sluggish 2% in the six months to December 26 but the earnings outlook is far brighter, with management forecasting an increase of between 29% and 34% in HEPS for the period.
The 19.2% sales increase reported by Mr Price for the three months to January 1 2022 looks considerably less flattering when recent acquisitions Power Fashion and Yuppiechef are stripped out. As it’s only a quarterly update, no
earnings forecast is provided by Mr Price.
TFG’s strong 17.3% hike in retail turnover for the three months to end-December has to be seen in the context of a years-long acquisition spree but even allowing for that, the quarterly performance looks robust. As with Mr
Price, TFG’s update does not include an earnings forecast.
Sasfin’s Alec Abraham agrees SA retailers have done an excellent job in extremely difficult times but says it’s difficult to draw useful conclusions from the recent updates, given the state of flux on almost every front.
The latest retail sales figures from
Stats SA reflect a better-than-expected performance, but the post-2019 trend remains significantly below what was achieved in 20092019. Abraham doesn’t see much hope of breaking from the weaker trend in the near term but notes: “Most of the retailers have managed to make progress on stock levels as well as expenses, which will be very beneficial in the coming year.”
Though the pandemic appears to be easing, the outlook for economic growth is a grim 2%.
And this year ANC politics is likely to mean little attention being paid to crucial economic issues.
While giving a nod to the benefit of its acquisition strategy, Abraham describes TFG’s performance as impressive, noting that it beat the market in each of the spaces in which it operates — SA, the UK and Australia.
Protea Capital Management senior investment analyst Richard Cheesman says that after five busy acquisition years, it’s difficult to know what to make of TFG right now.
Given SA retailers’ value-destroying record with international operations, he’s still cautious about TFG’s Australian and UK businesses, but on the home front he reckons Jet, bought from Edgars in 2020, is settling down well. While he acknowledges the strong showing from TFG, Cheesman seems more confident about Mr Price’s performance. “It hasn’t been involved in too much corporate activity, but instead has focused on its core business.”
The absence of distracting international operations probably helped Mr Price recover quickly from the fashion misread that knocked sales a few years ago. Power Fashion and Yuppiechef accounted for much of the sales increase in the three months to end-December, with management opting to keep November and December promotions to a minimum. This will help protect margins, which are being squeezed by increasing shipping costs and the inclusion of the lower-margin Power Fashion and Yuppiechef businesses.
And then there’s Truworths, which significantly underperformed in both its markets — SA and the UK — in the three months to early January. Cheesman says the group has struggled to increase revenue for a couple of years now, which is grim given increasing costs. “I might be worried if they had any debt, but the balance sheet is in good shape,” says Cheesman.
A seeming inability to adapt to a dynamic and competitive market has left Truworths “strategically ill-placed”, says Abraham. He reckons that in the absence of solid sales growth, the strong earnings forecast indicates management might have room to ease up on its conservative provisioning policy.
Finally, there’s Woolworths. “What a terrible trading update,” says Aeon Investment Management’s Asief Mohamed, capturing the sentiment that seems to pervade the market. It has fuelled existential concerns about what was once an investor favourite. An analyst says it’s increasingly evident management has lost its way on clothing and may never get it right. “Woolworths seems to want to be a department store,” says the analyst, referring to in-store operations such as Levi’s and Sunglass Hut. “In the past, by focusing on classic clothing, Woolies
In the past, by focusing on classic clothing, Woolies could buy in large volumes and undercut the competition; it … now seems to be just muddling along
could buy in large volumes and undercut the competition; it has abandoned that strategy and now seems to be just muddling along.”
Says the analyst: “The unrelenting challenges in Australia are drawing too much on top management; they need to spend more time sorting out the SA issues. Country Road is a good brand but they’ve got to get rid of David Jones.”
While few expected clothing or Australia to do well, the big shock in the latest trading update was the signs of pressure on the food front. Woolworths seemed to have an unassailable position on its high-margin food offering. The relatively minuscule 2.8% increase in food sales in the six months to end-December suggests that while the top executive team has been forced to fight fires on several fronts, competitors have breached the ramparts.
Abraham is concerned about the unrelenting pressure on the group’s clothing and Australian businesses, though he notes both Country Road and David Jones outperformed a very weak Australian market. He cautions comparison with the 2021 food performance is misleading, too. “Lockdown restrictions saw lots of people stockpiling food and Woolworths’ target market was eating at home instead of at restaurants; it was a boom time for the group.”
Despite all the excitement about the inroads Checkers has made into Woolworths’ traditional top-end food market, Abraham says it’s much too early to panic about the retailer losing its perch.
Cheesman, meanwhile, is not terribly worried about the apparent loss of share of the food segment to Shoprite. He agrees with Abraham that much of the recent weakness is not tougher competition but more “out of home” dining. Almost uniquely, Cheesman is upbeat about progress achieved by Roy Bagattini, who took over the CEO slot in early 2020, just weeks before Covid was declared a pandemic. “Bagattini has had a positive impact — he’s making the right moves, stores seem better stocked,” says Cheesman, acknowledging that the improvements may not be reflected in the trading update. “It’s a big ship.”
Hopefully it’s for turning — not sinking.